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MARYLAND STATE FISCAL CONDITION: AN OVERVIEW FOR THE 1990S

Executive Summary

Since the early 1980s, Maryland's economy (as measured by its gross state product) has grown faster than the national average, state personal income has grown at a more rapid rate than the nation's, and Maryland's unemployment rate has been lower than the national average. Total state revenues have increased even more rapidly over the last several years. However, state revenues have consistently fallen below estimates, while expenditures, especially on income support programs, have exceeded projections. This experience underscores the fact that Maryland is an open economy, affected by national trends beyond the control of state (and national) decision makers.

Because Maryland is an open economy, there are important national, and international, trends which impact state expenditure requirements. Some of these trends have broad effects, while others affect specific programs more directly. This paper provides a qualitative discussion of trends, generally outside the control of state and local officials, which will affect the future demand for state programs.

Two fundamental trends will have potential affects across a number of departments, Maryland's increasing population and shifting responsibilities in our federal system from federal to state and local governments. For example,

  • Maryland's population is aging -- the share of the state's population under 18 declined from 35.2 percent in 1970 to 25.4 percent in 1987 and the 65 and over age group increased from 7.6 percent of the population in 1970 to 10.4 percent in 1987.
  • the state's population is being dispersed over a wider area of the state increasing the demand for infrastructure, especially the transportation network and the construction of new school buildings.
  • the federal share of total own-source government revenue fell from 65 percent in 1962 to 54 percent in 1987 while the state share increased from 17 to 26 percent.
  • Between 1981 and 1987, state and local own-source expenditures for services increased 66.4 percent while federal own-source spending for civilian services increased only 38.7 percent.
  • in addition to shifts in revenue raising and spending responsibilities, the federal government promulgates regulations mandating certain service standards be provided by state and local government and these regulatory mandates often are not paid for by the federal government.
  • In addition to these general trends, there are specific trends, or components of these general trends, that will directly affect expenditures for specific state programs. For example,v
  • the state's school system is being affected by an increase in 1 to 4 year olds which are up 28 percent between 1980 and 1987 -- these children have contributed to the increase in public elementary school enrollment over the last three years and will reverse the current down trend in enrollments in secondary schools in the 1990s.
  • as the state recognizes and responds to the need to train a work force to compete effectively in the global economy and information age, there will be greater emphasis on computer literacy and other high technology skills which will require schools to acquire instructional computers and other high technology equipment as well as requiring continued professional development of existing staff.
  • the Medical Assistance Program accounts for more than half of the budget of the Department of Health and is affected directly by the aging of the state's population -- enrollees 75 years or older represent 5.8 percent of total eligibles, but account for 21.3 percent of total payments and blind and disabled eligibles accounted for 6.4 percent of enrollment, but received 30.8 percent of program payments. Thus, increasing age and disability are indicators of higher program expenditures on a per enrollee basis.
  • technological advances being made in medical care and diagnosis will have significant implications for future medical costs -- first, these advances usually lead to significant investments in capital equipment and personnel training to make these services available to the general population, and second, because of advances in medical care and diagnosis, more people are being kept alive for longer periods of time than before these technological advances.
  • there will be an increasing demand for state resources for transportation because a greater share of the responsibility for providing transportation services will be shifted from the federal to state and local governments, federal regulatory initiatives often increase the cost to the state of providing transportation services, and there is increased pressure from the state's growing population, its increasing geographic dispersion, as well as changing patterns of economic activity, different lifestyles and the trend toward smaller families which generate diverse transportation needs.
  • another trend that will significantly increase the cost of providing transportation services is the increasing awareness of the environmental costs associated with certain transportation alternatives.
  • because of the globalization of the national economy and the resulting restructuring taking place there is a need to continually upgrade the skills of the state's work force which has contributed to increasing enrollments at institutions of higher learning, in spite of a declining number of high school graduates.
  • in view of the dispersion of the state's population, there is a need to deliver higher education services outside of the traditional university campus format in a more decentralized manner which may involve large capital expenditures in rapidly growing suburban jurisdictions.
  • in addition to the impact of an aging population on its programs, the Department Human Resources shares the cost of the casualties of the drug war, e.g. drug affected newborns, which account for approximately 10 percent of the births in Maryland, cost the state approximately $52,000 per child from birth to age 18 (for those born in 1989 this suggests a total cost of support of nearly $400 million).
  • another troubling trend is the apparent shift of traditionally urban problems (drugs, teen pregnancy, homelessness) to the suburbs, e.g. the net affect of case load trends over the last five years is that the number of AFDC cases in Baltimore City declined by 13 percent while the number of cases increased in Baltimore County (up 17 percent), Carroll County (up 21 percent), Howard County (up 104 percent), Montgomery County (up 13 percent), Talbot County (up 19 percent), Washington County (up 15 percent) and Wicomico County (up 11 percent).
  • changes in lifestyles will contribute to an increasing demand for programs provided by the state, e.g. now that a majority of women work, there is an increasing demand for day care services; as our social awareness of child, spousal, and elderly abuse increases, there will be greater referrals, expectations for help, and need for programs to address these problems; and in programs where Maryland's grant levels rank relatively low among states (such as Maryland's 21st state ranking in AFDC grant levels), there will be continued pressure to raise benefits.
  • in part as a result of the war on drugs and the increase in mandatory sentencing the state's correctional facilities face severe problems as adult arrests are up dramatically, the average length of time served has increased and the annual cost of supporting each inmate increased from $11,800 in 1984 to $19,700 in 1988.

As currently constituted and implemented, the state budget and spending affordability processes do not provide an opportunity for adequate consideration of these long-term, societal changes and their implications for state expenditure requirements. The process has been compared to looking through a keyhole where the observer has a narrow (short-term) field of vision which ignores potentially important events (longer-term exogenous trends) taking place outside the line of vision. Of particular concern is the relatively rapid growth of the 0-18 and 65+ portions of the state's population (segments of the population which are primary beneficiaries of many state programs) vis-a-vis the relatively slower growth of the 18-65 age group which are typically the largest contributors to state tax revenues. These trends may have important implications for the relation between the increase in demand for state services and growth in personal income.

There should be a mechanism which formally considers the potential impacts of such exogenous trends if no explicit policy actions were taken by the Governor or the legislature. A true current services budget, which projects revenues and expenditures three to five years in the future, is one such mechanism. If such information were systematically included as part of budget deliberations by both the executive and legislative branches, explicit policy decisions about changing program demands, priorities and delivery systems would be facilitated.

Currently, the legislature's initial contribution to the budget process is the determination of spending (and debt) affordability limits. These limits have provided binding constraints on the growth in state spending in the last few years. However, there is no systematic relationship between actual growth in state personal income and recommended growth in state spending. One could argue that, because of trends beyond the control of state officials which may affect the demand for state services, there should not be any formal, fixed relationship between state personal income and state spending. Officials need flexibility to respond to such pressures.

If the purpose of the spending affordability process is to maintain state spending as a specific percentage of personal income, it has been unsuccessful. More importantly, however, if the state is to respond to the societal trends discussed above as they are manifested in increasing demands for state funded services, mandating state expenditures be a constant share of personal income may be counter productive. An alternative approach would be to strengthen democratic processes for developing an annual budget. For example, such processes must be fully informed, again illustrating the need for a true current services budget projection.

In such an informed environment, the legislature and governor can think strategically about how the state can meet emerging needs in a cost effective manner. The state need not respond by spending more. Rather, the state might respond by considering alternative service delivery mechanisms.

The 1990s will be a decade of continued, and perhaps accelerating, change. Global and national social and economic trends, beyond the control of officials in Maryland, will affect the businesses and residents of the state in many diverse and unexpected ways. As a result of these changes, there may be significant increases in the demand for goods and services provided by the state. Decision makers must have the information and flexibility to respond to these changing conditions. While it is likely that state expenditures will increase in the future, it is also likely that dramatic changes in the way state objectives are defined, programs developed and services provided will be required to meet the challenges of the 21st century.